Professional Documents
Culture Documents
Table of Contents
Executive Summary............................................................................. 2
Introduction......................................................................................... 2
Advantages of Centralizing the Internal Audit Function...................... 4
Disadvantages of Centralizing the Internal Audit Function................. 5
General Observations.......................................................................... 7
The Australian Case Study Centralization........................................ 8
The United States Case Study Partial Decentralization.................. 11
Conclusion........................................................................................ 15
Authors and Reviewers...................................................................... 16
Supplemental Guidance:
Optimizing Public Sector
Audit Activities
July 2012
www.globaliia.org/standards-guidance
Executive Summary
Governments across the globe are considering or are in the process of restructuring their internal audit activities. There are several reasons; these include, among others,
political, fiscal, or organizational considerations. Generally, economy and efficiency are
key benefits identified for centralization, and effectiveness is the key benefit identified
for decentralization. The bottom line for each organization is to look at its unique situation and decide what is best.
This guidance describes the advantages and disadvantages of restructuring. It is based
on two case studies, described within this guidance.
When considering restructuring public sector audit functions, some general observations can be made:
zzReporting
lines of the Chief Audit Executive (CAE) should be very clear. This is
particularly important to preserve boundaries and ensure confidentiality. There is
the potential that the CAE could have conflicting pressures regarding reporting
organizational risks.
zzCare
should be taken that the audit organization does not become, or is not perceived to be, an external auditor. It is essential that it retain the role of internal
audit.
zzHaving
multiple audit steering committees brings its own challenges; the resolution depends on the particular model used.
Introduction
This guidance examines the potential advantages and disadvantages of restructuring
public sector audit activities. The analysis applies to government agencies that have
their own internal audit units that are decentralized and are considering their amalgamation, as well as those that have a centralized internal audit organization and are considering partial or complete decentralization.
This guidance does not consider the relative benefits of outsourcing the internal audit
responsibilities, even though some of the arguments are used in discussions to support
either outsourcing or in-sourcing depending on ones focus.
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case where separate organizations, departments, or agencies are being combined under one portfolio and, as a result, the audit activities servicing the separate organizations are being consolidated into one centralized unit.
zzA
case where an organization had one centralized audit group and has, based on
evaluated need, split the activity into separate units to foster better accountability
and transparency.
Any organization considering a change from its current organizational structure with
respect to management of the internal audit activity should consider the advantages and
disadvantages of each option and determine what is best suited for the organizations
current stage of maturity.
As a general rule, any organization that does not have robust administrative processes
and sound controls in place among its separate audit units may best be managed
centrally. Alternatively, an organization that is mature in its management and is seeking
efficiencies, standardization, and consistency across its portfolio may also benefit from
centralization.1
Conversely, an organization that services different unique customer needs, is focused on
specific audits, and is confident of its overall administration and management of audit
resources may best be managed in a decentralized manner.
This guidance assumes that the units being consolidated are closely located geographically and that travel, that affects time and budget, and communication costs are not
factors being considered.
This guidance includes two case studies.
zzThe
zzThe
second shows the benefits of partially decentralizing the internal audit and
advisory services of the City of Austin, Texas (United States). Its goal was to
create a control ownership environment with the citys operational management
leading to better accountability and transparency in Austins local government.
1 To determine the maturity level, see the book titled Internal Audit Capability Model (IA-CM) for the
Public Sector, copyright 2009, The Institute of Internal Auditors Research Foundation (IIARF).
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{{Administrative
zzIntegrating
{{It
zzProviding
{{Without
zzRecruiting
{{While
2 The term board is used in this guidance as defined in the International Standards for the Professional
Practice of Internal Auditing (Standards) Glossary: A board is an organizations governing body, such as a
board of directors, supervisory board, head of an agency or legislative body, board of governors or trustees
of a nonprofit organization, or any other designated body of the organization, including the audit committee to whom the chief audit executive may functionally report.
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which could prove challenging in job scheduling. Larger units also can develop
specialty audit programs.
zzFacilitating
Conclusion:
zzCentralizing
zzCentralizing
zzGovernments
that currently lack internal audit coverage could gain added oversight as a result of consolidation.
zzHaving
only one audit plan better allocates audit resources to enterprise wide
goals and minimizes audit duplication and overlap through coordinated coverage
of risk areas by internal audit, external audit, and other oversight groups.
zzAudit
zzA
larger pool of central resources provides pockets of expertise that better align
with government risk profiles (e.g., IT audit resources).
zzMore
zzSaving
costs of internal audit software tools and training can be realized in volume purchases.
zzCentralizing
quality assurance of the whole internal audit function is a key component driving process consistency and efficiency.
Disadvantages of Centralizing
the Internal Audit Function
There are real and perceived disadvantages to integrating like activities, and they can
apply generally to any organizational units being combined. For example:
zzLoss
is an important perception and should be managed by constantly communicating intentions, consulting with staff, and ensuring that appointments
in the amalgamated structure are made equitably and without real or apparent
favor. If properly managed, loss of ownership or power should not be a real
threat to integration.
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zzGeneral
zzLoss
zzIncreased
zzHigher
zzIndividual
zzIf
not placed correctly within the organization, internal audits role and importance may diminish.
zzCentralization
zzReduced
zzMedia
risk to agencies or governments is not always confined to larger organizations and processes. Increased communication is required to foster better awareness and understanding due to less daily interaction.
zzCentral
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General Observations
Some general observations can be made when considering consolidating public sector
audit activities, including:
zzThe
reporting line(s) of the CAE should be very clear (i.e., who is actually in
charge). This is particularly important to preserve boundaries and ensure confidentiality. There is the potential that the CAE could have conflicting loyalties in
reporting organizational risks.
{{The
zzCare
should be taken that the consolidated audit organization does not become,
or is not perceived to be, an external auditor rather than retaining the role of
internal audit.
{{For
{{It
is also important that the chief of the consolidated internal audit activity
regularly attends executive forums of the integrated agencies.
zzHaving
multiple audit steering committees brings its own challenges, and resolution depends upon the particular model used. Consideration can be given to:
{{Each
{{Establishing
{{Having
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zzCentrelink
delivers a range of Commonwealth services to the Australian community to assist people in becoming self-sufficient and supports those in need.
zzMedicare
zzCommonwealth
zzChild
Planning
The planning for the amalgamation separated the implementation into three separate
phases:
Phase 1: Amalgamation. This phase took effect quickly and changed the
reporting lines of audit staff in the five agencies by requiring that all
audit staff report to the chief audit executive, who is referred to as the
Portfolio General Manager, Audit.
Phase 2: Consolidation. This phase comprised a six-month program commencing from the date that the reporting lines were changed. It considered and proposed new roles for the separate audit committees and
made other short-term administrative changes, including:
zzIntegrating
zzStandardizing
zzUniting
zzRationalizing
zzOrganizing
zzArranging
staff training.
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integrated structure would retain senior positions that would, as a prime responsibility, manage the audit activities for each of their former agencies. Agency
heads could call on these positions for advice and to conduct work on behalf of
their agencies.
{{This
zzThere
would be only one audit executive responsible for delivering the overall
portfolio audit program.
{{While,
zzAdministrative
{{This
would not only achieve savings through rationalization and increased effectiveness, but also was an important integrating activity so that the previous
administrative activities could be blended into one.
zzStaff
continued to carry out their audits prior to consolidation, and would continue to be located in their existing premises.
{{This
allowed staff to maintain their contacts within their former agencies and
minimized disruption while the separate phases were being implemented.
{{A
Experience to Date
The experience has been mostly beneficial and positive from every perspective. There
have been some lessons learned from the Australian experience, including:
zzWorkload
managers.
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zzNecessity
{{It
is necessary to engage the top executives of the agencies that have been
amalgamated. This diminishes concerns and assists in building confidence in
the amalgamated organization.
zzIt
is important that staff be consulted about all the changes and management
communicate proposed changes.
{{In
yy Whether
{{Big
zzIt
zzConsider
{{This
is an important aspect given, in some countries, the legislative requirement of these committees and the responsibility of the agency heads for their
respective audit programs.
zzAssurance
{{It
is necessary to address project assurance and ensure that any risks associated with the consolidation are known and addressed as well as that the
consolidation is well-managed.
10
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Government Organization
City government is organized into six separate operating groups that comprise multiple
departments within each group (as shown below). Each group is headed by an assistant
city manager, including the city managers chief of staff.
zzFinancial
{{Chief
Financial Officer
{{Treasury
{{Budget
{{Purchasing
{{Controller
{{Convention
center
{{Communications
{{Human
resources/labor relations
zzDevelopment
{{Economic
{{Planning
Services
{{Sustainability
{{Watershed
{{Real
Office
protection
estate services
{{Aviation
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Services
Water Utility
{{Capital
Planning Office
{{Public
Works
{{Austin
Resource Recovery
{{Transportation
zzCommunity
Services
{{Animal
Services
{{Health
{{Library
{{Neighborhood
{{Parks
zzPublic
and Recreation
Safety
{{Code
compliance
{{Community
{{Emergency
{{Medical
court
medical services
director
{{Fire
{{Homeland
security
{{Police
zzChief
of Staff
{{Building
{{Public
services
information
{{Small
{{Fleet
services
{{Governmental
relations
There are also direct reports to the city manager, and to the city council (as mentioned
above):
zzDirect
{{Austin
Energy
{{Police
monitor
{{Law
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department
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{{City
auditor
{{City
clerk
{{Municipal
court/judges
Department
Title
Austin Energy
Internal Auditor
Internal Auditor Senior
Regulatory Auditor Senior
Audit Manager
Austin Water
Aviation
Convention Center
Human Resources
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Planning
The decentralization of auditing is a dynamic process. The approach comprises five steps.
Step 1:
Step 2:
Step 3:
Step 4: Creation of an audit and assurance committee. This committee assists in facilitating effective collaboration to avoid duplication
of efforts as well as provide pathways where each unit would be able
to rely on the work of the other audit activities and where centralized
efficiencies can be realized. This includes, but is not limited to, coordinated development of professional standards policies, training, and
computerized audit tools.
Step 5: Creation of a quality assurance coordinator. A quality assurance
activity was created in the OCA to provide ongoing reviews of the various auditing and assurance activities in the city. The results of those
reviews will be presented to the individual boards, or to the department head, as appropriate.
overall responsibility for governmental auditing for the city and city management remains with the city auditor.
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zzAll
departments desiring to create an audit and assurance office and use the title
of internal auditor or auditor should be required to follow the Standards as well as
standards mandated by laws, regulations, ordinances, etc. Human resources and
city management coordinate with the OCA when proposing the creation of an
auditing activity and the use of any title including the word auditor. All decentralized offices are subject to audit by the city auditor to ensure that audit quality and
standards are adhered to in accordance with the Standards and all other applicable standards.
Even in a decentralized environment, there are benefits to having a coordinating organization where all activities are represented.
Experience to Date
The experience has been beneficial and resulted in other actions and lessons learned:
zzOther
zzThere
zzA
dotted line or other closely coordinated structure is ideal. Clear goals, responsibilities and roles, and planning should be defined.
zzPlanning
zzEmbedded
zzThere
Responsibilities for audit committees or the top of the auditors reporting structure
should be well-defined.
Conclusion
There are several reasons for restructuring. For example, there are often political, fiscal,
and organizational considerations. Generally, economy and efficiency are key benefits
identified of centralization, and effectiveness is the key benefit identified of decentralization. But it is not always that clear.
Politics, available skilled resources, a means to gain control of dysfunctional organizations, response to scandal or citizen discontent, etc., can all impact the appropriate
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15
structure of an audit function. At times the benefits can actually switch back (i.e., decentralization might be more economical). Or, a rapidly expanding organization cannot
maintain itself using a centralized basis. Or, at times anexpanding organization should
centralize to gain control and impose a uniform culture.
The bottom line is that each organization has to look at its unique situation and decide
what organizational structure is best.
Reviewers:
Greg Hollyman, CGAP, CFSA, CFE, CISA, CCSA, CIA (Australia)
16
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Disclaimer
The IIA publishes this document for informational and educational
purposes. This guidance material is not intended to provide definitive answers to specific individual circumstances and as such is only
intended to be used as a guide. The IIA recommends that you always
seek independent expert advice relating directly to any specific situation. The IIA accepts no responsibility for anyone placing sole reliance
on this guidance.
Copyright
Copyright 2012 The Institute of Internal Auditors. For permission
to reproduce, please contact The IIA at guidance@theiia.org.
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